Host government control of MNEs : Squibb Egypt case study
The socio-economic development of many developing countries depends heavily on the flow of foreign capital brought about by multinational enterprises' (MNE's) activities. However, there is evidence that the actual benefits derived by host countries from these enterprises are often less than expected. Accordingly, this clearly supports the need for an effective government control framework to increase the benefits of these foreign enterprises to the host country. This study therefore examines, both theoretically and empirically, the types of controls operated at present, with a view to establishing an appropriate framework for future control. A host government control framework consists basically of two complementary and integrated control processes: an entry control process to ensure that only those foreign enterprises which will be of benefit to the national economy are approved; and an operational control process to check that the project's operations are carried out in accordance with approved plans. In practice, the control mechanism focuses on the role of local accounting and reporting systems, and the role of the government auditor rather than other government bodies responsible for applying the control process. Egypt has been selected as the focus for the study, since many MNEs operate there under the open door economic policy, and it is believed that the many incentives given to attract foreign investment have allowed MNEs to gain greater benefits than they give to the country. Squibb Egypt, a foreign subsidiary in the pharmaceutical sector, is taken as a case study, in view of the importance of the sector to the Egyptian economy, and its increasing domination by foreign enterprises. Data have been collected through interviews from government departments and agencies dealing with MNEs in Egypt and Squibb Egypt. The result of the case study has indicated that Squibb Egypt has made only a modest contribution to the economy. This deficiency is attributable to the lack of the control system currently operated by the Egyptian government over MNEs. This provides a strong case for arguing that the adoption of a sound government control system is essential to alleviate many of the problems and deficiencies raised in this study, and to meet both national objectives and those of foreign enterprises.The research is divided into three main parts. The first, containing two chapters, examines the general relationship between a host government and the MNE, and describes a control framework model which could alleviate the problems arising from MNE entry and operations within a host country.Part two, which also contains two chapters, presents an overview of foreign investment in Egypt from 1952-1987, reviewing the open door policy and appraising its impact on the economy, and the control system currently operated by the Egyptian government.The empirical research is presented in the six chapters of part three, which examines the development of Squibb and the controls exercised over it, and evaluates the company's financial performance and its contribution to the Egyptian economy. Finally, recommendations are made to improve the evaluation and control over MNEs by host governments, with a view to maximising the benefits obtained from them.